BRUSSELS, June 27 (Reuters) - In the latest shift away from
the austerity of the euro zone crisis, European Union leaders
signalled at a summit that they were ready to give member states
extra time to consolidate their budgets as long as they pressed
ahead with economic reforms.

Under pressure from Italian Prime Minister Matteo Renzi, the
leaders adopted a text which pledged to make "best use" of the
flexibility built into the bloc's fiscal rule book - the
so-called Stability and Growth Pact.

Renzi, whose country has the second biggest debt in Europe
at more than 135 percent of gross domestic product (GDP), has
been pushing for a more growth-friendly interpretation of the
fiscal rules since taking office in February, because without
faster growth Rome won't be able to pay down its debts.

"If a country enacts serious structural reforms, it has the
right to flexibility, which is the most important political
point," Renzi told reporters at the end of the two-day summit.
He called the new language a "turning point" for Europe.

In reality, Europe has been shifting towards a softer fiscal
stance since last year in an effort to revive growth in
struggling southern states, and combat high unemployment,
particularly among young people.

Countries like France and Spain have already been given
extra time to reach the EU's deficit target of 3 percent of
gross domestic product (GDP). In parallel, the European Central
Bank (ECB) has cut interest rates to record lows to ward off the
threat of Japanese-style deflation in the 18-member euro zone

Germany, the most ardent defender of tough budget policies,
has been worried that fiscal leniency could lead to a new
spending spree by governments taking advantage of low borrowing
costs and open the way for a new crisis.

ITALIAN-GERMAN DEAL

But Renzi and German Chancellor Angela Merkel reached a deal
late on Thursday which stresses the need for a flexible
interpretation of fiscal rules, while stopping short of any
change to the EU pact.

Merkel stressed at a news conference that it would be up to
the European Commission, not member states themselves, to decide
whether extra time was granted.

"The best use of flexibility means the best use, not the
fullest use but the best, the most appropriate for the
situation," Merkel said.

Under EU rules, governments have to strive towards a budget
close to balance or in surplus, excluding one-off revenue and
spending and the effects of the business cycle. They also have
to reduce public debt.

But the rules also say that governments can be given more
time to reach budget balance if they undertake reforms that have
a verifiable positive impact on economic growth -- an option
that has so far never been used.

"Structural reforms that enhance growth and improve fiscal
sustainability should be given particular attention, including
through an appropriate assessment of fiscal measures and
structural reforms, while making best use of the flexibility
that is built into the existing Stability and Growth Pact
rules," the text agreed by leaders read.

The structural reform option, however, will be of little use
to France, which has been backing Renzi's push for more
flexibility, because it only applies to countries that have a
budget deficit smaller than 3 percent of GDP.

Paris, which has a deadline of 2015 to cut its budget
shortfall below that level, will have to wait until then to take
advantage of that option.

Some EU policymakers worry that using the structural reform
clause opens the way for a more political approach to the rules.

This is because it is very difficult to quantify with any
degree of accuracy what effect a structural reform will have on
growth, especially in the longer-term.

The amount of leeway granted in structural deficit reduction
can therefore be politically influenced.

"The rules are fine. The way in which they are policed and
enforced is not. The challenge is to improve the process in a
way that minimises the inevitable political strains," Berenberg
Bank chief economist Holger Schmieding said.
(Reporting By Noah Barkin in Berlin, Giselda Vagnoni, Alastair
Macdonald, Gregory Blachier and Jan Strupczewski in Brussels;
Editing by Paul Taylor)